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Offshore banking means opening a bank account outside your home country. While it’s often associated with shady practices (such as tax evasion and money laundering), there are many — perfectly legal — reasons why you might want to open an offshore bank account. An offshore account can be useful, for example, if you’re living or working abroad, or you travel frequently to another country for business. Or, you might want an offshore account if you get paid in foreign currency for freelance work, or you’re looking for international investing opportunities.Whatever the reason for opening an offshore account, the process typically requires jumping through a few more hoops than you would if you were opening a domestic bank account. Here are key things to know about offshore banking.
What Is Offshore Banking?
Offshore banking means having any type of bank account at a financial institution located outside of your home country. While "offshore" often connotes images of a bank located on a Caribbean island, it actually describes any country that is not your own. If you live in the U.S., a Canadian bank is considered "offshore.”Offshore checking and savings accounts can make it simpler to manage your financial commitments across multiple countries and regions. They can be useful if you need to make, or receive, regular international payments and transfers. Many expats (people who reside outside their native country) have a bank account in their home country and another account in the country they're currently living in. Offshore accounts also allow you to hold and invest money in more than one currency.
How Do People Open Offshore Bank Accounts?
Generally, you can open an offshore bank account in much the same way that you would open a bank account at home. The exact process will depend on the country and bank, but there will likely be more steps involved than opening a domestic bank account.Before you begin the application process, it’s a good idea to read all the fine print and make sure you understand the bank’s requirements for opening an account, its policies regarding initial deposits and ongoing account minimums, and any fees (including monthly fees and transfer fees).
Offshore Banking Requirements
Offshore banks typically have more requirements and ask for more paperwork than domestic banks. This is to help discourage money laundering, tax fraud, or other illegal activities often associated with offshore banking.Requirements will vary depending on the bank, but you may need to provide the following information:
Personal information (e.g., name, date of birth, address, citizenship, and occupation)
A copy of your country-issued ID (such as a driver’s license or passport)
A copy of a utility bill or other bill that verifies your home address (since this affects taxation)
Proof of good standing with your current bank (this may be satisfied by providing statements for the last six to 12 months)
Information about the kind of transactions you expect to make through the account (this may lead to more document requirements, such as a wage slip or information about your investments or any assets you own overseas)
You’ll likely also need to prove that your documents are authentic. This may simply mean getting them notarized. In some cases, however, you may need a special certification used internationally called an apostille stamp. This requires going to that country’s local government office to get your documents stamped.Recommended: Guide to Opening a Bank Account Online
Are Offshore Bank Accounts Legal?
Yes, offshore bank accounts are legal. While offshore bank accounts have earned a shady reputation, there is nothing illegal about opening a bank account in a foreign country, provided you don't use that account to hide money, avoid paying taxes, or conduct any other illegal activity.
Pros and Cons of Offshore Bank Accounts
Here’s a look at some of the benefits and drawbacks of offshore banking.
Pros of Offshore Bank Accounts
Cons of Offshore Bank Accounts
Convenient if you live or frequently travel overseas
May have stricter requirements to open an account
Typically come with a debit card, as well as online and mobile banking
Can be harder to access your money
Allows you to hold money in more than one currency
Higher fees
Makes it easier to invest internationally
Could lose your money if bank/local economy is unstable
Pros
Offshore banking offers convenience if you currently live or make frequent trips to a foreign country, or support family members that live in a foreign country. Plus, these accounts often offer similar features and benefits to those offered by U.S. banks, such as a debit card and online and mobile banking. In addition, offshore banking allows you to hold money and make or receive payments in multiple currencies, as well as access international investment advice.
Cons
On the downside, offshore banking has long been associated with shady practices, such as tax evasion, money laundering, and organized crime. Because of this, activities in an offshore bank account are generally monitored closely. There may be more requirements involved in opening an account, as well as more rules and regulations regarding use of the account. Fees, as well as minimum deposits and ongoing balance minimums, are also typically higher than those associated with domestic accounts.You’ll also want to keep in mind that if the foreign bank were to go bankrupt, you could potentially lose your money.Recommended: How Many Bank Accounts Can and Should You Have?
Choosing a Currency for Offshore Banking
Offshore accounts often allow you to choose the currency for the funds in your account. This can be an attractive feature, since you may be able to choose a currency you expect to increase in value or one that you expect to do most of your transactions in. Keep in mind, however, that if you hold a savings account in a foreign currency and earn interest in that currency, you may trigger a foreign tax liability.Also, keep in mind that you may need to exchange currencies when you make withdrawals or deposits, which could be costly due to fluctuating exchange rates and exchange fees.Recommended: What Are High-Yield Savings Accounts?
Operating an Offshore Bank Account
There are some differences in how you can operate an offshore bank account compared to a domestic bank account. Here’s a look.
Withdrawals
Offshore accounts typically provide a debit card that you can use internationally; some also offer checkbooks. You can also generally make withdrawals via wire transfer from your offshore account to your domestic account (though there will likely be fees involved).
Deposits
You generally can’t use the same free service you use to transfer money between your domestic checking and savings accounts to deposit money into an offshore bank account. Instead, you typically need to deposit funds via international wire transfer (which comes with fees). When practical, you can also deposit funds in person.Recommended: Guide to International Banking
10 Common Offshore Banking Countries
The following offshore banking countries are popular due to the benefits they offer, including favorable taxes, excellent financial services, account privacy, political stability, and/or global business connections.
Switzerland
Hong Kong
Germany
Belize
Cayman Islands
Singapore
Republic of Seychelles
Nevis
Mauritius
Panama
Keep in mind that, no matter what country you choose for an offshore account, you can’t escape U.S. taxes by earning or keeping your money in a foreign country. By law, you need to file the IRS FBAR form and report any holdings in foreign accounts that exceed $10,000.
What Factors Make a Good Offshore Banking Location
Here are a few factors you may want to consider when you're trying to decide on the best offshore banking location.
Will Your Money Be Safe?
Offshore accounts aren’t protected by the Federal Deposit Insurance Corporation (FDIC), which insures U.S. bank accounts up to $250,000 per depositor, per insured bank. However, some countries have similar protection policies in place. When considering how safe your money will be in an offshore bank account, you’ll want to do some research into:
Whether or not the bank offers insurance on their accounts
The bank’s reputation
The stability of the local currency
The stability of the country’s government
How Expensive Is It to Open an Account?
It's common for offshore banking accounts to have higher account set-up fees due to the additional paperwork involved. Any ongoing fees, such as monthly maintenance fees, international transfer fees, or fees for going below a certain balance, will vary depending on the bank. It’s a good idea to carefully read the account’s terms and conditions, so you know what fees will be going in and won’t be in for any unpleasant surprises.
Can You Open and Access Your Account Remotely?
If you don’t often travel to the country where you’ll have your offshore bank account, you’ll want to be sure you can easily access your money remotely. Before opening an account, be sure that you are comfortable with the bank’s accessibility, including online banking, wiring, and electronic funds transfer (EFT) procedures.
The Takeaway
While you might think that offshore bank accounts are only for the ultra-rich or those involved in nefarious business transactions, the truth is that anyone can open an offshore bank account, and there are many — perfectly legitimate — reasons for doing so. If you’re simply looking to get a higher return on your deposits, however, you may be able to find a great banking solution closer to home. With Lantern by SoFi’s online banking marketplace, it’s easy to compare high-yield savings accounts based on annual percentage yield (APY), fees, and balance minimums.Lantern can help you compare online savings accounts and find today’s best rate.
Frequently Asked Questions
Are offshore bank accounts legal?
How expensive is it to open an offshore bank account?
Are offshore bank accounts safe?
Photo credit: iStock/volgariver
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About the Author
Dan Miller
Dan Miller is a freelance writer who's spent nearly a decade covering developments, trends and advances in the finance space. His expertise extends across financial sectors including personal finance, student loans, budgeting, credit cards and mortgages. Miller's work has been featured on sites such as NerdWallet, Forbes, Business Insider, Rocket Mortgage and Intuit Mint.
